Chapter 4 Exercise 7

7. Overhead application: Working backward

The Towson Manufacturing Corporation applies overhead on the basis of machine hours. The following divisional information is presented for your review:

Division ADivision B

Actual machine hours 22,500?

Estimated machine hours 20,000?

Overhead application rate $4.50 $5.00

Actual overhead $110,000 ?

Estimated overhead ? $90,000

Applied overhead ? $86,000

Over- (under-) applied overhead ? $6,500

Find the unknowns for each of the divisions.

Solution: Computation of the missing Figures Division A:

Estimated Overhead = 20000 x $4.50 = $90,000

Applied Overhead = 22500 x $4.50 = $101,250

Over /Under Applied Overhead = 101250 110000 = $8,750 Underapplied

Division B:

Actual Machine Hours = 86000 / 5 = 17,200Estimated Machine Hours = 90000 / 5 = 18,000Actual Overhead = 86000 6500 = $79,500Chapter 4 Problem 2

2. Computations using a job order system General Corporation employs a job order cost system. On May 1 the following balances were extracted from the general ledger;

Work in process $ 35,200

Finished goods

86,900

Cost of goods sold 128,700

Work in Process consisted of two jobs, no. 101 ($20,400) and no. 103 ($14,800). During May, direct materials requisitioned from the storeroom amounted to $96,500, and direct labor incurred totaled $114,500. These figures are subdivided as follows:

Direct Materials

Direct Labor

Job No.

Amount

Job No.

Amount

101

$5,000

101

$7,800

115

19,500

103

20,800

116

36,200

115

42,000

Other

35,800

116

18,000

$96,500

Other

25,900

$114,500

Job no. 115 was the only job in process at the end of the month. Job no. 101 and three "other" jobs were sold during May at a profit of 20% of cost. The "other" jobs contained material and labor charges of $21,000 and $17,400, respectively.

General applies overhead daily at the rate of 150% of direct labor cost as labor summaries are posted to job orders. The firm's fiscal year ends on May 31.

Instructions:a. Compute the total overhead applied to production during May.

Solution: Computation of the total overhead applied to production during May

Total overhead applied = 114500 x 1.50 = $171,750

b. Compute the cost of the ending work in process inventory.

Solution: Computation of the cost of the ending work in process inventoryCost of ending work in process inventory = 21000 + 17400 + (17400 x 1.50)

Cost of ending work in process inventory = 21000 + 17400 + 26100 = $64,500c. Compute the cost of jobs completed during May.

Solution: Computation of the cost of jobs completed during May

Cost of jobs completed during May = 35200 + 96500 + 114500 + 171750 64500

Cost of jobs completed during May = $353,450

d. Compute the cost of goods sold for the year ended May 31.

Solution: Computation of the following Cost of goods sold year ended May 31 = 353450 + 128700

Cost of goods sold year ended May 31 = $482,150

Chapter 5 Exercise 11. High-low methodThe following cost data pertain to 20X6 operations of Heritage Products:

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Shipping costs $58,200 $58,620 $60,125 $59,400

Orders shipped 120140175150

The company uses the high-low method to analyze costs.

a. Determine the variable cost per order shipped.

Solution: Computation of the variable cost per order shipped

Variable cost per order shipped = (60125 58200) / (175 120)

Variable cost per order shipped = 1925 / 55 = $35b. Determine the fixed shipping costs per quarter. Solution: Computation of the fixed shipping costs per quarter

Fixed shipping costs per quarter = 60125 (35 x 175)

Fixed shipping costs per quarter = 60125 6125 = $54,000

c. If present cost behavior patterns continue, determine total shipping costs for 20X7 if activity amounts to 570 orders.

Solution: Computation of the following

Total shipping costs for 570 orders = 54000 + (35 x 570)

Total shipping costs for 570 orders = 54000 + 19950 = $73,950

Chapter 5 Exercise 2The treasurer anticipates the following costs for the event, which will be held at the Regency Hotel: Room rental

$300 Dinner cost (per person)

25 Chartered buses

500 Favors and souvenirs (per person) 5 Band

900

Each person would pay $40 to attend; 200 attendees are expected.

a. Will the event be profitable for the sorority? Show computations.

Solution: Computation of the following

Yes, the event will be profitable in the total amount of $300. See computations below :

Total revenues = 40 x 200 = $8,000

Total variable costs = (25 + 5) x 200 = $6,000

Total fixed costs = 300 + 500 + 900 = $1,700

Net Income/Profit = 8000 6000 1700 = $300

b. How many people must attend for the sorority to break even?

Solution: Computation of the following

Number of people must attend to BREAK-EVEN = 1700 / (40 -25-5)

Number of people must attend to Break-even = 1700 / 10 = 170c. Suppose the sorority encouraged its members to drive to the hotel and did not charter the buses. Further, a planned menu change will reduce the cost per meal by $2. If each member will still be charged $40, compute the contribution margin per person.

Solution: Computation of the following

Contribution margin per person = 40 (25 2 +5)

Contribution margin per person = 40 28 = $12Chapter 5 Exercise 3

3. Break-even and other CVP relationships Cedars Hospital has average revenue of $180 per patient day. Variable costs are $45 per patient day; fixed costs total $4,320,000 per year.

a. How many patient days does the hospital need to break even?

Solution: Computation of the patient days does the hospital need to break even

Number of patient days needed to break even = 4320000 / (180 45)

Number of patient days needed to break even = 4320000 / 135 = 32,000

b. What level of revenue is needed to earn a target income of $540,000?

Solution: Computation of the revenue is needed to earn a target income of $540,000Revenue needed = (540000 + 432000) / (135/180)

Revenue needed = 4860000 / .75 = $6,480,000c. If variable costs drop to $36 per patient day, what increase in fixed costs can be tolerated without changing the break-even point as determined in part (a)?

Solution: Computation of the following Total fixed cost allowed = (180 36) x 32000 = 144 x 32000 = $4,608,000Increase in fixed cost by = 4608000 4320000 = $288,000Chapter 5 Problem 6

6. Direct and absorption costing

The information that follows pertains to Consumer Products for the year ended December 31, 20X6.

Inventory, 1/1/X6 24,000 units

Units manufactured 80,000

Units sold 82,000

Inventory, 12/31/X6 ? units

Manufacturing costs:

Direct materials $3 per unit

Direct labor $5 per unit

Variable factory overhead $9 per unit

Fixed factory overhead $280,000

Selling & administrative expenses:

Variable $2 per unit

Fixed $136,000

The unit selling price is $26. Assume that costs have been stable in recent years.Instructions:

a. Compute the number of units in the ending inventory.

Solution: Computation of the number of units in the ending inventory

Number of units in ending inventory = 24000 + 80000 82000 = 22,000

b. Calculate the cost of a unit assuming use of:

1. Direct costing.

2. Absorption costing.

Solution: Computation of the following

Cost of a unit:

1. Direct costing Unit cost = 3 + 5 + 9 = $17

2. Absorption costing Unit cost = 3 + 5 + 9 + (280000/80000) = 3 +5 +9 +3.50 = $20.50c. Prepare an income statement for the year ended December 31, 20X6, by using direct costing.

Solution: Computation of the following

Important Note: The Problem No Selling Price Given, hence Sales, Contribution Margin, & Net Income Cannot Be Computed

Consumer Products

Income Statement - Direct Costing

For the Year Ended December 31, 19X6

Sales

$

Variable costs:

Cost of goods sold

1,394,000

Selling & administrative 164,000

1,558,000

Contribution Margin

Fixed Costs:

Factory overhead

280,000

Selling & administrative 136,000 416,000

Net Income

$

Working notes:

Sales = 82000 x $

Cost of goods sold = 82000 x 17 = 1394000

Variable selling & admin = 2 x 82000 = 164000

Total variable cost = 1394000 + 164000 = 1558000

Total fixed cost = 280000 + 136000 = 416000

d. Prepare an income statement for the year ended December 31, 20X6, by using absorption costing.

Solution: Computation of the following

Important Note: The Problem No Selling Price Given, hence Sales, Contribution Margin, & Net Income Cannot Be Computed

Consumer Products

Income Statement - Absorption Costing

For the Year Ended December 31, 19X6

Sales

$

Cost of goods sold

1,681,000

Gross Profit

Selling & administrative expenses:

Variable

164,000

Fixed

136,000 300,000

Net Income

$

Working notes:

Sales = 82000 x $

Cost of goods sold = 82000 x $20.50 = 1,681,000

Variable selling expense = 82000 x $2 = 164,000

Total selling & admin. expenses = 164000 + 136000 = 300,000